The Center For Debt Management
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“Debt Consolidation”
Do You Know the Facts?

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Home Equity Loans & Second Mortgages

Everything mentioned above regarding debt consolidation loans apply here as well. In fact, consolidation loans are often home equity loans. Consolidation loans, however, need not be a home equity loan.

A home equity loan and a second mortgage both use the equity in your home as collateral. A home equity loan typically provides a “line of credit” and only when funds are drawn from it do interest charges accrue and payments begins. In contrast, a second mortgage typically provides the borrower with a “lump sum” of money. Interest is charged on the entire amount borrowed and monthly payments begin immediately. Both types of loans typically require processing fees, an appraisal fee and possibly other costs.

The annual percentage rate (APR) of such loans may be extremely reasonable. Consumers, however, must factor in all of the costs of getting the loan. After doing all of the calculations, in some cases, the actual cost may be much higher than anticipated. Even so, the net result could end up with a better interest rate than your current average interest rate of the debts you intend to pay off—if that is what you intend do with the proceeds! On the other hand, depending on many factors, including your credit worthiness and equity, the cost of processing the loan and resulting monthly payments might not provide you with any relief at all.

The problem most debtors have—is not having enough equity in the first place. Traditionally, lenders use a formula for determining eligibility and how much they will lend. This is usually based on a percentage—from 50% to 80% of the current market value of the home, less the amount that is still owed on it. If the current market value is appraised at $100,000, lenders will typically lend $50,000 to $80,000 maximum—that is, if you own the home free and clear. If the amount owed is $75,000 and the home owner is able to find a lender offering a loan at an 80% loan-to-value ratio, he or she may get a $5,000.00 loan. After paying the processing fees and other costs, however, they would only get a portion of this amount.

The advantage of a second mortgage or a home equity loan is that the interest is tax deductible for individuals itemizing deductions. Therefore, one must take this aspect into consideration and analyze the net result after taking this deduction. It may prove beneficial to discuss this issue with an accountant.

Whether a home equity loan or second mortgage is right for you depend on many circumstances, but generally you need a fair amount of equity in your home to make it worthwhile. Also, as noted under “Debt Consolidation Loans” there are many risks and concerns that must be considered. In particular, should you default on the loan, you could end up losing your home. If the purpose for acquiring the loan is primarily to consolidate “unsecured” debt, you are well advised to give it serious thought.

A better option may be to just borrow enough to consolidate “secured ” debt, and perhaps certain unsecured accounts that are likely to result in legal action should the debtor default. This would lower the monthly payment and reduce the risk of defaulting on the loan. Should the borrower later run short, funds could then be taken from the budget allocated for unsecured debts. While this would place the unsecured account(s) in jeopardy, such action could, as they say, save the farm!

If a debtor has a significant amount of secured debt and unsecured debt, another option that may be available, is to obtain a home equity loan to consolidate “secured” debt and then enroll in a Debt Management Program (as described below) to consolidate “unsecured” debt. For heavy debtors this is a very viable option that provides a safety factor and could yield significant savings in interest charges, late fees and other charges.

Debt Consolidation Through
Consumer Credit Counseling

For many consumers experiencing financial hardship, enrollment in a nonprofit Consumer Credit Counseling Agency's debt management program may be their best option for debt relief. A debt management program, however, is not for just anyone. First of all, a lot depends on who the creditors are. Credit counseling agencies primarily negotiate unsecured debt, such as credit cards, installment loans, retail finance plans, medical bills and personal debts. Second, contrary to popular belief, credit counseling agencies cannot force creditors to accept their proposals. Although most creditors will work with these agencies to effect a workable solution, many creditors have minimum payments (based on the outstanding balance) that they will accept. Therefore, an applicant needs to have sufficient income to support the revised lower payment, as well as enough income left for basic living expenses.

How Debt Consolidation Through a
Credit Counseling Agency Works.

Most creditors offer special repayment plans to their customers who undergo financial hardship and enroll in a nonprofit consumer credit counseling agency's debt management program. Upon enrollment, creditors are then informed that their customer has entered a debt management program and are asked that they reduce the client's monthly payment, reduce or stop interest, stop late fees and overlimit charges, and to re-age past due accounts to bring them current. Because most creditors support the agency, these special repayment plans are usually accepted.

In the typical scenario, enrollment in the program will reduce the consumer's overall monthly debt service 15% to 40% and reduce the average interest rate significantly. In addition, once enrolled, correspondence from creditors regarding past due accounts are directed to the agency. In other words, in addition to the above benefits, the program puts an end to upsetting collection calls and, financially speaking, offers the consumer a new lease on life.

Unlike a lender providing a “debt consolidation loan,” when consumers consolidate their debt through a nonprofit credit counseling agency, the agency does not then become the creditor. In this regard, the agency is, in essence, a conduit for disbursing payments to their client's creditors. While the consumer's original creditor(s) retain all legal rights and may take legal action should the consumer default on the negotiated payment, the agency itself has no such rights, and in fact, has no interest in or desire to take legal action. Contrary, the agency works “on behalf of their clients” to prevent such problems from occurring.

The only way to determine if debt consolidation through a Consumer Credit Counseling Agency would benefit a consumer is by analyzing the consumer's current financial profile. If qualified, applicants may elect to enroll in the debt management program offered by the agency.

In summary, if you have been considering debt consolidation or are currently experiencing financial hardship, it is important that you weigh all of your options. We hope that this article has provided you a great deal of insight in this regard. If you are unsure which path to take, we invite you to fully explore our web site. You will discover a wealth of information relating to debt management. We happen to agree with one of our visitors, who remarked, “Your site is an oasis in a financial desert.” We are proud of what we have achieved through the past 20 years and dedicated to serving our visitors.

If you have concluded that one of the options outlined above is right for you, perhaps it's time to act now! Regardless of which option you elect, you may apply online right now. Simply check out the various resources displayed on this page and throughout our website. There is no cost to apply and in most cases, you will know within hours if you are approved.

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